Global Partners LP (GLP) Q1 2016 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Global Partners’ First Quarter 2016 Financial Results Conference Call. Today’s call is being recorded. There will be opportunity for questions at the end of the call. [Operator Instructions] With us from Global Partners are President and Chief Executive Officer, Mr. Eric Slifka; Chief Financial Officer, Ms. Daphne Foster; Chief Operating Officer, Mr. Mark Romaine; Executive Vice President and Chief Accounting Officer, Mr. Charles Rudinsky; and Executive Vice President and General Counsel, Mr. Edward Faneuil. At this time, I would like to turn the call over to Mr. Faneuil for opening remarks. Please go ahead, sir.

Thank you. Good morning and thank you for joining us. Before we begin, let me remind everyone that this morning, we will be making forward-looking statements within the meaning of Federal Securities Laws. These statements may include, but are not limited to projections, beliefs, goals and estimates concerning the future financial and operational performance of Global Partners. Estimates for Global Partners’ EBITDA guidance and future performance are based on assumptions regarding market conditions, such as the continuation of a competitive crude oil market, business cycles, demand for petroleum products and renewable fuels, utilization of assets and facilities, weather, credit markets, the regulatory and permitting environment, and the forward product pricing curve, which could influence quarterly financial results. We believe these assumptions are reasonable, given currently available information and our assessment of historical trends. Because our assumptions and future performance are subject to our wide range of business risks and uncertainties, we can provide no assurance that actual performance will fall within guidance ranges. In addition, such performance is subject to risk factors, including but not limited to those described in our filings with the Securities and Exchange Commission. Global Partners undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements that may be made during today’s conference call. With Regulation FD in effect, it is our policy that any material comments concerning future results of operations will be communicated through news releases, publicly announced conference calls, or other means that will constitute public disclosure for purposes of Regulation FD. Now, please allow me to turn the call over to our President and Chief Executive Officer, Eric Slifka. Eric?

Thank you, Edward. Good morning, everyone, and thank you for joining us. As we reported this morning, our financial results for the first quarter of 2016 were affected by tight crude differentials, significantly warmer temperatures and rising wholesale gasoline prices. While weather fluctuation in commodity prices are factors that are always present and may affect our performance in a particular quarter, the core elements of our business terminaling, marketing and retail have been and remain fundamentally strong. The particular challenge to Global or current climate is the uncertainty surrounding the crude by rail market, crude differentials and the fixed cost associated with that line of business including rail car leases and pipeline commitments. Turning to our segment performance, wholesale segment product margin declined 51% in the quarter to $39.2 million from $80.1 million in the same period in 2015. Let me take you through the primary reasons for that nearly $41 million decrease. About $17.7 million is attributable to a reduction in crude margin and lower crude volumes. Approximately $13.4 million of the variance is attributable to the very favorable market conditions in wholesale gasoline in the first quarter of last year that did not recur in Q1 2016. When you back out that non-recurring event, wholesale gasoline margin in Q1 came in as expected. Lastly, the segment was also negatively impacted by unseasonably warm weather. Temperatures in this first year’s quarter were 26% warmer than the same period in 2015 and 12% warmer than the historical average. The impact of unseasonably warm weather decreased the margin in our weather sensitive product pools by roughly $10 million. In addition weather was the primary factor behind the $4.7 million decline in our Commercial segment. In our Gasoline Distribution and Station Operation segment, product margin was nearly $10 million higher in Q1 2016 primarily due to the acquisition of Capitol Petroleum assets in June of last year. That said, retail gasoline margins were adversely affected by rising prices. In summary, we estimate that the combination of warm weather and rising wholesale gasoline prices negatively impacted our results by approximately $18 million in the quarter. Typically you do not get degree days back. Based on our experience however, retail fuel margin tends to average out over an annual basis. Now let me update you on some of our current activities. We’re using our storage capacities to capitalize on existing contango market opportunities. At our basin transload terminal in Beulah, North Dakota, we have entered into a two-year term lease agreement to lease 208,000 barrels of storage to a third party and have also signed a one-year agreement to lease track space. At our Oregon facility, our tank conversion and dock construction project is on schedule to be completed in the third quarter. The tank conversion will allow us to utilize almost 200,000 barrels storage capacity for ethanol transloading. The upgraded dock will enable the terminal to handle Panamax class ships. These projects open new opportunities in the ethanol markets. In terms of our strategic divestiture program, NRC Realty and Capital Advisors is coordinating the sale of 86 non-strategic gas stations and convenience stores in the Northeast and Mid-Atlanta. This package of sites has received significant interest from prospective buyers. Final bids on the sites are due in late June. We also continue to enhance our retail network. Several razed and rebuilds and new-to-industry sites are slated for opening this year. In addition we currently have expanded our portfolio in Western Massachusetts with the addition of 22 leased sites. Turning to our distribution in April, the Board of Directors announced a quarterly cash distribution of $46.25 or $1.85 on a annual basis, unchanged from the quarter of 2015. The distribution will be paid May 16 to unit holders of record as of the close of business on May 6, 2016. Before closing let me take a moment to congratulate our CFO, Daphne Foster on her recent election to the Board of Directors. Since joining Global in 2007 Daphne has contributed in multiple areas. During her tenure we have strengthened our fiscal management, broadened our capital markets relationships and enhanced our treasury function. The Board looks forward to benefitting from her strategic insight as our seventh director. Looking ahead we will continue to streamline our portfolio and assess our lines of business by further optimizing our assets. While we can’t predict the timing of recovery with respect to crude by rail that asset base provides flexibility to move quickly as market conditions improve. With that, let me turn the call over to Daphne for her financial review, Daphne?

Thank you, Eric, and good morning everyone. Let me start with some color on our first quarter performance. Combined product margin was down approximately 19% by $35.6 million year-over-year to $154.5 million. As Eric noted this decline was driven by warm weather, tight crude oil differentials, particularly strong performance in wholesale gasoline last year, which did not recur this quarter and rising wholesale gasoline prices, which negatively impacted margins in our GDSO segment. SG&A and operating expenses excluding amortization declined $10.2 million, primarily due to $6.7 million in acquisition and severance related costs in connection with the Warren acquisition in the first quarter of 2015. $5.1 million left in the crude incentive comp and a $3.3 million decrease in various other expenses including professional fees. Together these reductions more than offset the $1.4 million in severance charges incurred relating to the January 2016 reduction in workforce and a $3.5 million in operating expenses primarily related to the Capitol acquisition. We expect a reduction in workforce to generate approximately $5 million in annual sales. As a result of the lower product margin, despite lower expenses, first quarter EBITDA of $42.6 million was down $29.3 million from the same period in 2015. In the first quarter of this year, we recorded a $5.5 million impairment charge related to assets, classified as held for sale approximately 28 retail sites and recognized a $0.6 million loss on the sale of eight gasoline stations. Excluding these charges, adjusted EBITDA of $48.7 million was approximately $23.6 million less than adjusted EBITDA of $72.3 million for the prior year period. Interest expense increased $9 million to $23 million. The increase was due to the issuance of $300 million 7% bonds in June of 2015. The sale lease back accounting for Capitol and the resultant $2.4 million re-classed from rental expense, additional borrowings to fund a portion of the acquisitions and $1.8 million write-off of the deferred financing fees associated with our elective production of our revolving credit facilities. Distributable cash flow for the quarter decreased $37.3 million to $16.4 million from $53.7 million a year earlier. Excluding the $6.1 million loss on the sites sold or held for sale, DCF would have been $22.5 million in this year’s first quarter as compared to $54.1 million in the first quarter of last year. TTM distribution coverage was 1.1 times. Looking at our segments in more detail, in the wholesale segment our crude oil product margin decreased $17.7 million year-over-year to a negative margin of $2.4 million due to the tighter crude oil differentials as mid-continent crude oil did not discount sufficiently to make real transport to the coast competitive with imports. Additionally logistics volume was lower due to declining volumes with one particular contract customer. Our margin is also negatively impacted by fixed cost which includes contracted barges, pipeline commitments and rail car leases. The primary fixed cost in the first quarter with our rail car lease expense of $11.7 million that was allocated to crude oil as compared to $11.6 million in the first quarter of 2015. Approximately two thirds of these rail cars were in storage as of March 31, 2016. The future lease expense for these rail cars is estimated at $33.6 million for the remainder of 2016, $45 million and $39 million in 2017 and 2018 respectively. With a significant reduction to approximately $20 million in 2019 after which the leases expire. The pipeline commitments for the full year 2016 are $13.1 million reflecting the Summit Meadowlark connection to our Stampede facility and Tesoro High Plains Pipeline. Wholesale gasoline and gasoline blend stocks product margin was down 45% to $16.4 million, but as Eric mentioned, performed largely in line with expectations. In the first quarter of 2015 there were particular favorable conditions in the wholesale gasoline market including contango early in the quarter followed by refinery problems, which caused shortages and expanded margins. Also within the wholesale segment, other oils and related products, which include distillates and residual fuel were negatively impacted by weather that was 26% warmer than last year resulting in a $9.8 million decrease in product margins to $25.2 million. Turning to our GDSO segment product margin from gasoline distribution increased $3.7 million to $65.4 million, primarily as a result of the capital acquisition in June 2015. Fuel margins were negatively impacted by the rise in wholesale gasoline prices during the quarter. The NYMEX price for 87 RBOB increased $0.35 per gallon from the end of January to the end of March. Our flat year-over-year cents per gallon fuel margin of approximately $0.18 in part reflects the addition of the capital sites. And certain ways in rebuild sites on the Connecticut Turnpike streaming on. Year-over-year retail gasoline volume increased 6.6% or 22.4 million gallons in the first quarter of 2016, also primarily due to the capital acquisition. Product margin from station operations, which includes rental income and C-store margin, was $42.9 million in the first quarter of 2016, $6.2 million or 17% higher than the $36.7 million earned in the prior year period. The year-over-year increase primarily reflects the additional rental income from capital as well as smaller increases in C-store margin, rental income and other revenue. Commercial segment product margin as Eric mentioned declined $4.7 million in the quarter due primarily to the warmer weather. Total volume for the first quarter of 2016 decreased 314 million gallons to 1.3 billion gallons. Slightly higher GDSO volume was more than offset by a decrease in distillates volume in the wholesale segment due to warmer weather and a decrease in gasoline and gasoline blendstocks volume also in the wholesale segment. The decline in wholesale gasoline volume was due primarily to an elected change in supply logistics for a particular customer in early 2015, which did not have a material impact on product margin. Our CapEx in the quarter was approximately $16.4 million including $11.6 million in expansion CapEx and $4.8 million in maintenance CapEx. Expansion CapEx consisted of $5.3 million in ongoing raise and rebuilds and improvements at our retail gasoline stations and $5.5 million in cost associated with our terminal assets including the dock expansion project at our Oregon facility, which began in 2015. Maintenance CapEx included $3.9 million related to our retail sites. Looking ahead for the balance of the year we continue to keep tight control over our expenditures and expect maintenance CapEx for the full year to be in the $35 million range. With respect to expansion CapEx we have no material committed capital expansion dollars in 2016. We're completing certain raise and rebuilds and as well as other investments in our GDSO segment and the dock expansion and related project infrastructure in Oregon. We expect expansion CapEx in 2016 to be in the $30 million range approximately half of what we spend in 2015. Any additional expansion projects will be evaluated based on their returns and financing sources. New industry sites for instance could be financed with build a suit leases. Turning to our balance sheet as of March 31, 2016, the partnership had total borrowing of $610.3 million under our $1.475 billion facility. Borrowings consisted of $275.1 million under our $5.75 million revolving credit facility and $335.2 million under our $900 million working capital facility. Our leverage defined as funded debt to EBITDA was 4.6 times, an increase since year end, but well within our 5.5 times covenant. Given the headwinds and uncertainty in the crude market, our priority is to position ourselves to manage through a longer period of challenging industry conditions. Our goal is to maintain a strong balance sheet with ample liquidity and we target long-term leverage of four times and lower. We continue to tightly manage expenses and capital expenditures. As Eric mentioned we're moving forward with our strategic asset divesture program and we expect these assets sales to generate material proceeds that will enable us to reduce debt and reinvest in the business. In addition, our real estate portfolio provides us additional optionality with which to raise capital. For 2016 we affirm our outlook for EBITDA in the range $170 million to $200 million. Now let me turn the call back to Eric for his concluding comments.

Thank you, Daphne. In summary, we have a solid core business that should keep us on track to achieve our full year EBITDA guidance or 11.3 million barrels of storage capacity in the Northeast is complemented by a portfolio of well located retail gasoline and convenient stores. The combination of these assets creates a vertically integrated network that services daily demand. Now, Daphne and I would be happy to take your questions. Operator?

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Selman Akyol from Stifel. Please proceed with your question.

Thank you. Good morning.

Good morning.

I think on the last call you had 125 locations that you had identified potentially for sale. Is that still a good number in total? You got eight completed this quarter, a package for 86, and then should we just expect the rest over time?

Good morning, it's Daphne. As you can see the 86 that we announced, site sales has occurred during the quarter, I know was held for sale actually a really non-included the numbers that we put for the 125. Those sites that were held for sale we sold in the quarter really just part of ongoing site sales. So, additional sales could happen one after in bundle sale.

Okay. And then as I take a look at SG&A and you've got roughly $35 million in the quarter, if we adjust that for the $1.5 million severance, is that $33.5 million a good run rate on a go-forward basis?

Yeah, I think that’s a reasonable run rate. Clearly we expect to get on an annual basis $5 million in savings related to that reduction in fourth in the first quarter, but that’s a reasonable run rate.

All right. Then on the $6 million charge, was that a cash charge that you took? Was there a cash component to it?

No. That’s a non-cash loss in back half.

Okay, okay.

And, beyond.

Okay. And then previously, if my notes are correct, maintenance was at $40 million, now $35 million?

Yeah, brought that down a bit, yes.

Okay. And then is there, I understand I guess on the supply and logistics on the wholesale side for that particular customer it didn't impact your margin too significantly, but was there any more color behind on why they switched? It doesn't sound like you were too upset with the switching, given that there wasn't much margin in that.

Oh, in early 2015 no, this was just an elective change on their part. Didn’t impact us from a product margin standpoint. So really, we continue to talk about it because it does impact volume but it is clear that it didn’t impact our product margin in any material way.

All right. Thanks so much.

Thank you. Our next question today is coming from Barrett Blaschke from MUFG Securities. Please proceed with your question.

Hey guys just a quick question. As we start thinking about strategic asset sales, is it going to be limited to gas stations or could it expand beyond that?

Hey Barrett, it's Eric. we’ll always look to optimize around our assets in the best fashion. So that’s how we’ll view the portfolio of assets that we own right?

Okay. And then as we think about it, is it more geographically driven or is it just being maybe too dense on sites in a certain area if it is?

It could be anything, in some senses around the retail it's specifically what we consider to be non-strategic for our own internal purposes and where we want to have some consolidation and different market presence that may be due to some several factors and then just other assets that we would always look and just be opportunistic with.

Okay. On the gas station, is there a good EBITDA average run rate that we could keep in mind if we see one of these being sold, how much of a contribution that is? And then also sort of a target multiple for these kinds of assets these days?

Yes, it’s a little bit hard to -- sort of all over the Board and some will ultimately end up being so just as real estate. So, I think if you looked at multiples that were being sold in divestment processes throughout the retail market those numbers you know as well as I. Depending on the assets they go anywhere from sixes all the way up to in the teens right. It depends on the assets and where they are and what the quality assets are?

Okay. Thank you.

Thank you. Our next question today is coming from Lin Shen from HITE Hedge Asset Management. Please proceed with your question.

Hey. Good morning, thanks for taking my question. The first question is for the GDSO segment the margin is impacted by the rising fuel price in Q1. I'm just wondering in Q2 so far, do you see this trend continue?

What was the last line of your question, was do we see it continuing, sorry.

Yes, just so far, like in second quarter, do you see the trend continue because the crude prices continue to increase in April?

So just as a general statement when wholesale prices go up right, you margins tend to get squeezed at the retail. Right so who knows in the second quarter you could look at, where it was on March 31 and where it is today and for your conclusions for that but the general statement that when markets tends to raise, retail margins gets squeeze is pretty true.

Okay. Got it. And then also I think you mentioned that you were able to sublease or lease your terminal and also the truck space in North Dakota for two years agreement. Do you see there's more opportunity for you to further sublease or re-contract assets over there?

Well, it wouldn’t just be that asset or would be any assets that we have. We're looking to optimize and get the best value out of that asset and whether that's having us internally utilize that asset or having a third party utilize it. We’re always measuring multiple avenues to trying to get the great return for the company.

Great, James…

Yeah, It's James, just a couple of questions. I guess we’ve been seeing the data that gasoline demand is stronger than it's ever been. So, how does that affect you guys in particular?

Good morning James. It's Mark I think certainly the EIA has come out with numbers that would support growth in gasoline demand. I think we generally track with the EIA, what the EIA sees and with those trends. That being said for us, with regard to volume it's really not just about volume, for us it’s about volume and margin. So we literally corner by corner try to should optimize the volume margin equation. So, we may not only track specifically to the number we may be higher, we maybe lower. But directionally I think you could expect the same performance from our debt and see throughout the industry.

Okay. You spoke of your leverage being at 4.6 times and well within the 5.5, covenants. At what level do you see that maxing out this year?

I’m not going to give as we move forward. I think James we’ve been clear that we have a lot of the asset divestiture program that we have by the way and we expect to see significant proceeds from those actions as well as continue to manage expenses and leverage should remain within compliance.

Okay. I guess we can't say that we’re at the max though at 4.6?

Sorry we can’t say that max is 4.6.

Yes.

Yes I’m not going to predict where it’s going to go. It all depends in terms of timing of obviously performance and the actions that we're taking today.

Okay. And I guess last one for me, in terms of the crude, railcars and storage, is there any other option for them besides them being in storage or is that the best place to put them as you wake the leases running off. Is there any other options that you guys are considering?

Yes there is other options and we are and have been considering all of them. So we have been chasing opportunity to repurchase the cars into other service. So we have moved some cars in the ethanol service, some cars into biodiesel service and we continue to explore the possibility of the potential of moving cars into refined products service. That being said, the market is -- the railcar market is over supplied. So the opportunities are few and far between what we're looking to take advantage of any opportunity that presents itself. And we have our supply team working hard on that initiative.

Okay. Thanks guys.

Thank you. I would now like to turn the call back over to Mr. Slifka for any closing remarks.

Thank you for joining us. We look forward to keeping you updated on our progress. Have a great day everyone.

Thank you. That does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.